Solving the Market Meltdown -- They Privatized Profits; now We Socialize Losses

Bumped by GH; well worth a second look. Originally posted 2008-09-19 13:18:23 -0500.

Back in July, I wrote a short commentary about how the 21st century robber barons, as if following the playbook from the Gilded Age, had managed to privatize for their own pocketbooks, the profits from selling off our national treasures, our forests, our airwaves, our oil, our minerals.

Think for two minutes about where the profits from the logging in the national forests go. Do you, as a taxpayer in this country, see any of that? Or grazing rights? Do you, as taxpayer, see any of the gains from the practice of allowing private individuals to graze their herds on national park lands? Do you see share in the profits -- as the Venezuleans certainly do in theirs, since the Venezulean Oil company is nationalized -- of the oil that underlies our country (well, excepting if you are a recipient of the $1200 check to Alaskan citizens)? Privizating profits loosely translates to take what is owned by everyone and give the revenue to only a few rich individuals.

That's the meaning of privatizing profits.

This week, we are learning painfully about the other half of the equation: Socialize losses.

If a company is badly managed, bail it out by having everyone pay for it. Let the owners walk away with their golden parachutes, and have the taxpayers pick up the tab. No, we don't have enough to get ice for the survivors of Hurricane Ike, nor can we repair our crumbling roads, or build mass transit, invest in clean energy... but we sure can rescue, with our tax dollars, the AIGs and Bear Stearns...

That's socializing losses... making the little guys pay for the mistakes of the uber class. Those guys in the upper atmosphere are sucking up all the oxygen. According to a WSJ article, entitled charmingly Richest See Income Share Rise by Jesse Drucker:

The richest 1% of Americans in 2006 garnered the highest share of the U.S. adjusted gross income in two decades as their average tax rate fell,the IRS said.

And for those politically inclined and disturbed by what Drucker calls "the increasing inequality," hope is on its way. Sen John McCain "has proposed extending the lower tax rates of 15% on long-term capital gains" -- which will surely level out the inequalities. (okay, I am kidding about the hope thing, unless you are filthy with riches.)

Another Wall Street Journal article from this past summer anticipated this Resolution Trust buyout (socializing losses):Like S&Ls? Paying the Tab For a Cleanup

At some point banks may run out of funding sources or willing buyers for their misfit loans. A three-letter solution is already on the lips of many investors: RTC.

Resolution Trust Corp. was established during the savings-and-loan crisis of the late 1980s and early 1990s. The clearinghouse sold off some $394 billion in assets of 747 failed S&Ls, costing the taxpayer about $76 billion, according to the Federal Deposit Insurance Corp.

Potential losses in this crisis are far larger, with estimates of $1 trillion or more being bandied about. Taxpayers won't be on the hook for anything close to that. But their bill could make the $124 billion they paid, in total, for the S&L crisis seem a bargain.

See Virginia, there is a Santa Claus.

... for the rich.

Paid for by the rapidly getting poorer middle class.

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by Tony Wilkrent, needs to be emblazoned on every thinking-person's blog, at the top of front page.

Deregulation

Assuming the facts are straight, this sounds like criiminal conspiracy to commit what's turning out to be a global financial fraud.

I think the Head of the Securities and Exchange Commission and the boards and executives of those five banks need to be held to account.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

American taxypayers should pick the tab up??

Not if it is that clear exactly who is responsible. The exemption was a decision to put these entities outside of the law's regulatory burden to which everyone else must yield. Time to deal with the outlaws.



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

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"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

in an Op Ed entitled The GOP Leads Socialist Bailout:
"Now I know what former Gary Hart meant when he told an audience of wealthy Republican businessmen during his 1984 presidential campaign, 'I know why you are conservatives -- you favor private enteprise for the poor and socialism for the rich.'"

failures require systemic solutions. Ain't gonna happen. Gotta say that I've read about, and seen, more public pressure in both the 30's and 60's than anything we're seeing now. I'm holding on to audacious hope for regime change, and believe the changes will come fast and furious under an Obama administration (he already has a transition team in place).

But hope springs eternal, unlike cash which disappears in heartbeats.

biden spoke in my neighborhood today. I last lead up and introducing local politicos plus Barbara Mikulski but then finally he spoke. He was strong on a number of points.

First and probably most interesting he said he had been on a conference call this morning with Obama and Warren Buffet, Paul Volcker and some other financial players who I didn't identify at the time so don't remember. The gist was that Buffet said we are now seeing a period of collapse similar to the FIRST HUNDRED DAYS of the New Deal. Pretty strong stuff that! Then according to Biden was a discussion of how the need to protect the country's financial instruments had to have as it major purpose protecting of Americans such as elderly pension holders who are in danger of having their life savings wiped and people losing there homes.

Then he said long term the social program of protecting social security, bringing in universal health care etc., was tops on the agenda. That was hopeful to me in the present situation.

He had a great riff on what would have happened if the social security fund had been privatized and the market collapsed.

I didn't have the epiphany reported by DEF but he was impressive. So yeah I'm hanging in. I can't estimate the crowd. My friend and I got there early enough to be able to sit on a bench but most people were standing and therefore pretty packed in. It was not at a stadium but a local out door recreation area.

carol

And thanks for the report. I keep hoping people will want to have the adults in charge to take care of this mess.

Like that word, riff, too. (grin)

Discuss how the financie sector was subsidized by the government over the last 25 years at the expense of every other sector of the economy. Now the 25 year old bubble is bursting.

carol

author of Bad Money.

It's like the Book of Revelations for what's been happening these past few months.

Here are my notes on the funny numbers games with CPI and GDP relying on his explanations.

And here's some of what he had to say aboutthe Plunge Protection team, both in the book and in later articles.

non-embedded journalist's picture

This reminds me of the late 1980s, when I used to work for Riggs bank.

It was back in 1988 or 1989 that Riggs instituted a freeze on wage increases, hiring and improvements because we had apparently had a very "bad year".

However John Albritton (a senior Vice President for Riggs) was given a Christmas bonus that year (on top of his already generous salary) of over 11 million dollars!!!

The hard working employees of Riggs had to suffer through system-wide budget cuts because Riggs was apparently doing very poorly financially, but one of the executives was REWARDED for helping to drive the bank into financial dire straights!

Apparently this is how corporate America works. Apparently corporate America rewards incompetence and greed.